Understand what a credit score is, its importance in the credit industry, and the most commonly used credit score types.
Every credit organization, in its daily activities, faces the concept of credit rating. It is the basis for assessing the solvency of a potential borrower and deciding whether to grant credit funds.
A credit score is a numerical representation of a person's creditworthiness, which is used to assess the likelihood of timely fulfillment of debt obligations under a loan.
Traditional credit scoring considers a borrower's payment history, length of credit history, delinquencies, and other financial information.
One of the most popular scoring models used by modern banking institutions is the FICO model.
This is a popular method of assessing the creditworthiness of potential borrowers developed by Fair Isaac Corporation (FICO). It involves awarding credit scores to applicants for meeting certain metrics.
The FICO credit score consists of several components.
1. Payment history. The system checks whether the borrower has made payments on previous loans on time and in full.
2. Amount owed. This score shows how much of the available credit the borrower is using.
3. Length of credit history. The amount of time a consumer has been using credit accounts is assessed.
4. Types of credit products. The types of loans the customer has ever taken out – mortgages, credit cards, consumer loans, etc. are identified.
5. New loans. This item involves checking recently opened credit accounts and credit applications.
After analyzing this information, the consumer is assigned a credit score, which can range from 300 to 850 in the FICO model.
The image below shows what is the credit score range in this scoring model.
A credit score between 300 and 650 is considered the lowest credit score, which is also known as “Very Bad”.
A score in this range indicates a high credit risk and poor creditworthiness of the potential borrower.
In this case, there is a high probability that the loan application will be rejected.
Borrowers with a bad credit score are those with a score between 560 and 650.
These consumers may be approved for a loan, but may not be offered the most favorable loan terms, such as a higher interest rate.
A good credit score is a score between 650 and 750.
According to FICO, the average credit score among U.S. consumers is 717, which indicates a fairly high creditworthiness of Americans.
A score in the range of 750-850 allows us to talk about the highest credit rating of the borrower.
Such an indicator allows them to count on favorable credit conditions and a guaranteed positive decision on the disbursement of funds.
However, there are very few such people among borrowers. For example, only 22% of Americans have a credit score above 800.
Did you know that 7% of Americans will not be able to get a loan from a bank that considers a traditional credit scoring when evaluating borrowers' creditworthiness?
These are unbanked populations who simply don't have a credit history.
If we talk about developing countries, the percentage of unbanked populations is even higher. In Nigeria and Mexico, for example, it is 60 percent or more.
To expand the limited capabilities of traditional credit scoring, modern digital scoring systems provide credit scores enriched with alternative credit data, offering a more complete picture of borrower risk.
These go far beyond financial information about a potential borrower. For example, a scoring system can analyze a consumer's online activity, timeliness of rent payments, and even apply a reverse phone number search engine to evaluate mobile number usage statistics and digital identity.
Credit scoring system RiskSeal applies digital footprint analysis to create a digital footprint credit score, giving lenders deeper insights into consumer reliability.
